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How would you teach children about investing?


SmallCap

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Thinking about teaching my kids the fundamentals of investing and by that I don't mean the fundamentals of the financial markets, I mean the fundamentals of buying a $1 for $0.50 and either waiting for it to be recognized or selling it in a different market/different way to realize the $1 value.

 

FYI my kids are currently 8,6,4

 

I would love to show them how to be able to buy something tangible and either add value to it or realize the value through marketing/selling. It is a combination of investing/entrepreneurialism.

 

where would you look for opportunities that involve tangible items, under $100 price point, where there possibly is a scaleability issue that would prevent big money from dealing with it.

 

They are currently learning how to do work for others (outside of family) and get paid for it. And that's great as far as it goes so they now have some savings but I would like to help them learn how to make their money work for them instead of just working for money.

 

Any ideas or input?

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SmallCap,

I'll give you my take for what it's worth.

For basic financial education ie saving vs spending, how to buy a car, use of credit cards, how to make a budget etc, I think that parents can play a key role (walk the talk).

In terms of value investing hindsight, I would be... more realistic.

Successful value investing perhaps requires a certain mindset and attitude. The trait may not be so common and maybe the genetic/environmental factors may not be sufficient. Sorry. That's been my experience so far anyways.

Unless there is a true vocation, perhaps it is best to go with an index fund type of approach. In my case (I prefer to think long term but who knows?), I am setting up a way to put me off track when the time comes and alternative ressources have been identified. Index funds are also an option.

Having said the above, an entrepreneurial activity with the small ones can be useful AND fun. My mother used to say business before pleasure. But that's not in the offing anymore.

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Agree totally with cigarbutt. 

 

Research based, margin of safety type value investing is a vocation -  and in my experience suited to very few.

 

On the other hand, I think indexing can be taught to many people. 

 

To that end I think the following are a couple simple precepts to get across:

 

(1) Understand and respect and marvel at the power of compounding.  Do arithmetic together.  Show them how to do compound interest calculations over 20/30/40/50 years. Analyse jokes about how the cost of NY might have been better invested in bonds.  Look at how small annual differences have monumental effects when compounded over time.

 

(2) Realise that it's ok to do nothing and that investing activity is often an enemy.  Tell them that it is ok and normal to not know the future.  Look at examples of good performing long term assets where the greatest decision every day was to take no decision.  Even if the market price declined in 1973/4 or 1987 or 2008/9 - show them how clever it was to stay put. 

 

(3.)  Teach them what an index is and help them understand that in owning an index they own all the wonderful businesses that make up their lives.  That it's not just a number.  It's the car they drive, their phone, the movies they watch, the coffee they drink, the clothes they wear, the chocolates they love etc.  Encourage affection and attachment.

 

 

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Children are so young that they don't really understand concepts 20, 30 years out in any real way because they can't internalize them. That's multiples of their lifespan; it's harder for them to really comprehend when a day still feels like a long time.

 

I'd probably use some sort of hyperbolic growth scheme early on to catch their attention, until the point that it gets too expensive. Basically I'd match their savings so long as they kept it locked up for a year, or something, and gradually lower the rate of return to a more realistic level. I don't know if it'd work, but if I had a hare up my ass about it, that's probably what I'd do.

 

I probably wouldn't bother kids with it much, though. They have more important things to worry about.

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Seth,

 

What you are actually doing, is the best investment possible for a parent: Giving your kids a certain edge early on. What you are actually building now, is a margin of safety about your own future quality of life - as a parent with adult children, your children not causing you worries later in life. There is nothing more disabling to quality of your own of life than being a parent to a young person in some kind of trouble.

 

Thank God, so far, my own biological dauther has spared me that experience.

 

I remember 25 years ago having ongoing discussions at home with the mother to my daughter about raising her as bilingual, Danish and English, me speaking in English to my daugther. I ended up overruled, giving up on it. I regretted that for many years, but no longer, because my daugther is now fluent in English.

 

What was that "English thing" really about?: I would make sure avoiding my daugther doing my own biggest bummer with regard to education. In high school as a math/physics student I had to choose between [[English or German] and [French or Russian]] with regard to languages. I chose German and French. I found out what a bummer I had made while starting out at University. All books were in English, except books about Danish lax law. "Serve your self and get grip on both the language and the stuff that you have learn - or pack your stuff and leave..." I remember my line of thinking was then.

 

But I have had it in my personal sphere despite that in recent years. The Lady of the House has two kids from an earlier mariage, where the father of the kids died young. They are now in their early 30's and now doing well, not being the case, when I met their mother. I took them under my wings as were they my own kids, and taught them a thing or two about basic personal finances. What has made that activity make sense for me afterwards is, that I can feel on both of them, that they today appreciate what I did for them then.

 

- - - o 0 o - - -

 

My daughter is now studying at a university in Sydney, Australia, on her fourth year for her M.Sc. in Economics, at the age of 25. After college she spent two "sabbath years" from studying, one year working and making money, a half year at University at Honolulu, and a few months travelling around in the US with a her best friend before starting at University.

 

I remember when she was in Honolulu, on her Facebook page a photo popped up with the text: "Next time we will do Australia!"  The photo was of her, skydiving at large altitude over Honolulu, hanging in a tandem parachute... I thought she was joking then about Australia.

 

Some days I find my self getting worried: "What now if she falls in love with some strange talking Aussie out there and never comes back?" Then I mentally pushes those thoughts away from my mind, telling my self: "Stop beeing such an old selfish bugger - this is not about you - She is just doing exactly what you have always tried to teach her: Persuing her own dreams! ... At least Mr. Musk is not so far with his plans and projects, that she can go to Mars...."

 

- - - o 0 o - - -

 

Reminds about I that I have to order a copy of the Berskhire Hathaway Shareholder Letters avalable at Lulu.com to get it out to her!

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You don't actually need to teach them very much.  What you need to do is instill a few basic principles of how to live, and supplement that with a bit of knowledge.  There are two principles that I learned from my parents:

 

Principles of life:

 

1) From my father:  Don't be a hot dog and don't worry about what the other guy is doing.  Ever.  In all aspects of your life, do not show off.  Play your own game in a controlled and humble manner and don't worry about showing  off to "the other guy" how good you are or how flamboyant you are.  This has been important for me, as I have never felt the need to display wealth.  It meshes nicely with the Millionaire Next Door's observation of "big hat, no cattle".  I don't focus even slightly on the Joneses in large part due to my father's admonitions when I was a little kid.  I have never chased the sexiest investments and mostly avoided the tech-wreck due in large part to the preference to not be a hot dog, and instead quietly play my own carefully planned game.

 

2) From my mother: Live according to below your means.  Always.  Money does not burn a hole in your pocket and there's no need to spend every penny.  You never know when you'll need the little bit of money that you've accumulated (or the lot of money!).

 

 

Knowledge:

 

You don't need to transmit much knowledge to kids.  If they are at all curious, they can figure it out themselves:

 

1) It's been said already, but I will repeat it:  How does compounding work.

2) What are shares, bonds, and GICs, and how do they work.

3) In the particular legal, social, cultural and economic environment where you happen to live, what are the relative merits of investing in residential real estate either for personal use or as a rental.  (residential real estate is a great investment in some circumstances and a poor investment in others)

 

 

Personally, those few principles, a few bits of knowledge and my curiosity have served my well in life.  I have to say that when I read Veblen's Theory of the Leisure Class, I almost crapped my pants that my father had intuitively figured out most of it without any formal education in the area.

 

 

SJ

 

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The contract is very interesting...

I presume it is humorous but can't tell for sure...

By the way, your junior investor may need better legal representation as your rates meet the usury definitions!

When I thought that the World was filled with complacence about debt.

I would then respectfully submit: "It is not the healthy who need a doctor, but the sick."

Good luck with the kids. Do you ask them for collateral?

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Smallcap, one strategy is to talk to them about investing and value investing concepts in ways that are relevant to them (companies and products they like).

 

A little off topic but I started a Lego business with my kids to teach them the basics of running a business. My son was into Star Wars Lego and my daughter was into Harry Potter Lego; in the beginning the business funded their Lego purchases and over time got big enough to fund their phone purchase (when they hit grade 7). We purchased Lego collections off teenage kids (Craigslist, garage sales) and then sorted the bricks, picked the Lego sets and sold the sets we did not want to keep. It is time consuming (so you have to really like Lego to make it work). The key is to be patient on the buy side (only buy collections that are in great condition and loaded with the kinds of sets your kids are interested in). Bricklink is a great Lego resource (value of used sets etc).

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Greed works great.

Exchange the 'play money' in a monopoly set for 'real money' - and get out of the way.

 

Years ago I did this with Zimbabwe Dollars so that nephews could 'feel the money'. $200 for passing 'Go' became 1 million, expressed as a bank note; and the winner was the first to 1 billion. It worked great, but my sister went ballistic; & Monopoly became a dirty word. For years!

 

Neither nephew went into business; but they can both work numbers in their heads extremely quickly, and both are very good with money. Feel the money!

 

SD 

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The contract is very interesting...

I presume it is humorous but can't tell for sure...

By the way, your junior investor may need better legal representation as your rates meet the usury definitions!

When I thought that the World was filled with complacence about debt.

I would then respectfully submit: "It is not the healthy who need a doctor, but the sick."

Good luck with the kids. Do you ask them for collateral?

 

From reading it, it seems to me the child has the money on deposit earning 4% per month. Sounds like they're getting the better end of the deal...

 

Similar to the Lego story above, I intend to do kijiji/Craigslist buy-low-sell-high of whatever my kids are interested in with them when they are old enough.

 

My wife and I have always done that casually with our interests at the time throughout life (including rare books, musical instruments, jewelry, electronics, vending machines, and baby strollers). While we might not start the kids with shipping a 4 valve euphonium to Spain or buy 30,000 used books (both of which we've done) I think the buy a dollar for fifty cents is a useful skill whether you end up an investor or not, and the scale is appropriate for kids.

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The contract is very interesting...

I presume it is humorous but can't tell for sure...

By the way, your junior investor may need better legal representation as your rates meet the usury definitions!

When I thought that the World was filled with complacence about debt.

I would then respectfully submit: "It is not the healthy who need a doctor, but the sick."

Good luck with the kids. Do you ask them for collateral?

 

From reading it, it seems to me the child has the money on deposit earning 4% per month. Sounds like they're getting the better end of the deal...

 

Yeah, the idea is just to get the idea of putting money away, being patient, and making money by doing that.  Rule of 72 is a great quick and easy rule I'm teaching them.  The insane interest rate is just to serve as a carrot.  To a 5 year old earning 50 cents isn't nearly as interesting as earning a whole dollar.  Just doing this for 2 months and you can already see the excitement at the idea of compounding.  Once a kid, or any person, gets that concept then that's all the incentive they need to learn more.

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Thank you for great inspiration here, especially to Luke and Viking.

 

Certainly something to think about for me with regard to my only - so far - grand child [as I have already mentioned, I put all our childs in one bunch, thereby treating them all - and their decendants, as if they were all biologically decendants of me].

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The most important and simple concept is learning to save and not be a borrower. 

 

I believe Rockefeller's dad would first tax all of John's income as a kid and then send 10-20% of the remaining to the church.  You could put 10-20% away into savings every time they get income.  Maybe match it to really prove a point (similar to employer matching 401k contributions) or give them ~10% interest.  Provide them with quarterly statements and work through the math.

 

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  • 1 year later...

One of my kids (high school) was recently involved in a "contest".

It was organized by a teacher who used tools which I'm sharing below.

It was a fun opportunity to discuss stock investments (what to look for, how to filter or choose etc).

I did not agree with her choices :) but she did OK.

The second link allows to organize a smaller scale group.

 

http://www.howthemarketworks.com/

https://www.stockmarketgame.org/expparent.html

 

Sometimes I wish that I had been exposed to the stock market earlier on. But then again not.

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Thinking about teaching my kids the fundamentals of investing and by that I don't mean the fundamentals of the financial markets, I mean the fundamentals of buying a $1 for $0.50 and either waiting for it to be recognized or selling it in a different market/different way to realize the $1 value.

 

FYI my kids are currently 8,6,4

 

I would love to show them how to be able to buy something tangible and either add value to it or realize the value through marketing/selling. It is a combination of investing/entrepreneurialism.

 

where would you look for opportunities that involve tangible items, under $100 price point, where there possibly is a scaleability issue that would prevent big money from dealing with it.

 

They are currently learning how to do work for others (outside of family) and get paid for it. And that's great as far as it goes so they now have some savings but I would like to help them learn how to make their money work for them instead of just working for money.

 

Any ideas or input?

 

I've been thinking about teach a niece about net-nets. And I had this idea of having her father give her 10,000 a year for her to invest which I would supervise. Net-nets are simple enough that a 10 year old could learn them and overall performance is excellent. Its a pretty good way to start. I don't think it would be hard for a 10 year old to run a screen, go to an investor relations page, get current assets, total liabilities etc and calculate ncav. Its all arithmetic.

 

This would happen from 10 to 14. At 14 she get told that if she get a job, her father will match salary....she makes $10000, and he will double to $20k and in addition she get $10000 even if she does nothing. At this point she would be responsible for buying her own stuff (clothes, phone etc) and for paying for her university education. So she has to plan out how to save, invest and consume such that she has enough money to fulfill her current and future objectives, including university.

 

The whole point is the best way to save, invest etc is to actually do it and be responsible for it.

 

When I first tried teaching her about investing I essentially followed advice similar to Scott's. I showed her how money compounds at 20% a year for a long period in an Excel spreadsheet. I showed her that small changes in compounding rate don't contribute linearly to final value....going from 10% to 20% over a long period will do much more than double the final value. I taught her the 70 rule. She was 8. I know she didn't understand everything but she was definitely trying. She enjoyed it...at one point she exclaimed "I'm going to be rich!!".

 

The real worry about this isn't that she will take to it. I'm fairly sure that will be easy in this case. The greater danger is that she learns the lesson too well...she becomes overly cheap, she spends too much time thinking about money and/or that she brags about it. Kids have far more important things to do with their lives than worry about money (as is true for most people) and part of the education is to make sure she understands that.

 

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This sounds harsh - but for some people they will never get it.  I have a son who intuitively gets value investing, not sure about my daughter yet, 9 and 7. 

 

Here is what we do as my son is very interested in business:

 

My son has a snack business.  He buys chips, etc from Sam's club and sells them for a $1.  This is massive and it is concrete example he and I can refer to it constantly for him to better understand business concepts.  I had this with my Dad and his apartment building.  This puts way ahead of their peers.  (This would help tons of investors understand business if they ran their own businesses BTW). 

 

I like the Lego business a lot that 1 poster started!

 

There is so much to learn it is beyond massive but I try to tell my kids stories about business, frauds, failures,  irrationality, history, mistakes etc.  Sometimes when visiting stores we will talk about the business models or other aspects.  Talking about product quality or lack thereof. 

 

There are different philosophies about raising kids but mine is to talk business at the dinner table, etc. I think shielding kids from it and real life is a big mistake. 

 

The best learning is always through experience.  That is how our brains work.

So sometimes I will bet with my kids.  My son was about 3 or so, and he said he slept with his eyes open.  So I bet him $20 that he slept with them closed.  I go in at night when he is sleeping, take a picture of his obviously closed eyes and show it to him and collect $20.  The shitstorm I got from him and others was massive, but he doesn't bet anymore unless he knows he has good odds.  He even beat me out of $5 when I didn't believe that Bluejays bury acorns and eat them.  Damn - the teacher becomes the student!

 

 

 

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rukawa,

 

Thanks for the wise words. I have found that responsibility transfer on kids to be particularly hard even if I value the concept highly.

 

When I trained, a lot of it was based on the “see one, do one and teach one” type of learning. Going in steps made it work pretty well in most scenarios.

 

I submit that “teaching” kids about investing may be a factor leading them not to worry about money. :)

 

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There are different philosophies about raising kids but mine is to talk business at the dinner table, etc. I think shielding kids from it and real life is a big mistake. 

I think this is very smart. Frankly I don't understand families where money is a taboo subject. In my family money was always an open subject. We always talked about who makes what, what we spend different ways/ideas on how/where to save. What investments we have, why we bought them, how we finaced them. You get the picture.

 

I feel that I've learned a lot that way and that it prepared me well for life. But then again when my sister needs some money she borrows using her credit card despite the fact that she has a 100k portfolio. Maybe it's like LongHaul says. Maybe some people get it and some people don't.

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The closest thing to a market place I remember caring about as a kid was the used video game exchange program at a store equivalent to Gamestop. I remember realizing how rigged it was because I had to bring in 3 or 4 used games to get just one in exchange...

 

So maybe some kind of trade like that but using Craigslist, Facebook or Ebay to trade with other kids?

For example, they could buy a big bundle (someone getting rid of everything at once : their gaming system + all their games + the controllers, whatever) then resell each element separately. It takes work and patience to collapse the "holding discount" (deferred gratification) and if let's says they manage to recover their initial investment and still have a couple games left afterwards, essentially getting them for "free", I bet that would feel pretty good to an 8 years old.

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